Silver Market Update

By: Clive Maund | Tue, Apr 26, 2005
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The silver price has been in a giant contracting trading range for a little over a year now. From a glance at the accompanying 2-year, it is clear that a breakout from the giant symmetrical triangle that has formed is likely soon - probably within the next couple of months. Given the duration and size of this formation it is clear that a substantial move can be expected to follow a breakout.

The big issue for investors and speculators in silver and silver stocks is to try to predetermine the probable direction of breakout before it happens, in order to maximise gains from the ensuing move, as it is obvious that once it happens everyone is going to pile in and a sharp move will follow.

There are several factors pointing to an eventual upside breakout. The first is the general long-term trend, which is definitely up. On the 2-year chart we see that the lower line of the triangle formation, when extended back, is also the long-term uptrend line, from which the price has rallied no less than 5 times, which is actually rather surprising considering that this is supposed to be a rigged market. The importance of this uptrend line is reinforced by the proximity of the 200-day moving average, near which we would expect reactions from intermediate overbought levels to terminate. The huge ramp during Spring of last year, which resulted in a hideously overbought condition, was in good part due to the voluminous amount of hype by opportunists and cheerleaders, and was followed by a mini-crash that resulted in the price correcting back to the area of its rising 200-day moving average. Given the clear validity of this long-term uptrend line, and the continuing upward march of the moving averages there is no reason to suppose that the breakout is going to be anything other than an upside breakout. Currently, the moving averages are in positive alignment, meaning that a breakout could happen soon.

There are two other compelling indications that silver is destined to break out to the upside. One is the condition of the gold market, which also looks primed to break out to the upside before long. In regard to this it is very important that silver traders pause to take a good look at the long-term gold chart, and compare it to the silver chart, which we will do now. Notice how gold appears to be consolidating in a symmetrical triangle pattern above a zone of strong support. Like silver, it is not far above a very important long-term uptrend line, from which it has also rallied 5 times over the past several years. This uptrend has also formed near the 200-day moving average, which has risen relentlessly during this gold bull market. Yes, gold and silver MAY break down from these long-term uptrends, as in markets anything can happen, but the odds are greatly in favour of upside breakouts by both metals, and we are not attempting to determine what is going to happen with absolute certainly, our approach is to assess the probable outcome and then position ourselves accordingly. Fortunately, in the case of gold and silver and precious metals stocks at this time, we are looking at a very favourable risk/reward ratio, due to the great upside potential that now exists, coupled with a clear exit strategy should things not pan out as expected. Precious metals stocks are bombed out and sentiment in the sector is at abysmally low levels. A big fear prevalent in this market right now is that the sector could be dragged down by a severe decline in the broad market, and while that COULD happen, Adam Hamilton's latest essay, which addresses this issue in detail, makes it clear that there is no historical basis for this assumption. The clear exit strategy that establishes the very favourable risk/reward ratio is based on exiting positions in gold and silver, and in precious metals stocks, should the price of gold and silver close significantly below their long-term uptrends - as they are currently not far above these uptrend lines, risk is clearly defined and limited. Such a strategy obviously involves some danger of being whipsawed, but that's no problem, as there is always the option to re-enter positions should any breakdown subsequently prove to be a false move - better this strategy than to be caught by a significant decline.

The other big reason that silver looks destined to break higher is the bullish patterns that have developed in many silver stocks, following the severe corrective phase of the past year, detailed in the Silver Stocks Review article that went up on the site on 13th April.

Conclusion: we are at a great buy spot, not just for silver, but for gold and precious metals stocks generally. Upside is large, and risk at this juncture can be clearly defined and therefore limited. The time is right to buy across the board.

With this in mind we will be examining a broad range of gold stocks on the site in the near future.


 

Clive Maund

Author: Clive Maund

Clive Maund,
CliveMaund.com

The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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